Why Do People Want A Gold Standard When History Shows Us It Does Not Last?

It is curious to me that so many libertarians are dead set against any form of currency other than gold when history has made it abundantly clear that a gold standard can not be maintained.

Consider that as soon as gold is represented by paper (or digital account balances), all the checks against inflation of the money supply that gold provides are lost.  In order to argue that gold can not be inflated, one must also argue that all transactions in the economy must take place using physical specie.

Clearly this presents a problem in our digital age.  Imagine trying to buy something from Amazon.com.  You would have to place an order, and then mail your gold bullion to the seller.  There could literally be no digital accounts of gold at all if one wanted to ensure that the money supply could never be co-opted and inflated.  Obviously this would require the imposition of State rules to prevent people from digitally representing gold for its use as a money.

Clearly in order for gold to function as a currency in our modern age, it must be represented either by paper or digital account.  Which means it is ultimately of no more use in preventing inflation than if the government simply created rules today outlawing the inflation of dollars.

Inflation of the money supply under a gold standard is replete throughout history.  The US banks did it, European banks did it, every one did it!   In fact, fractional reserve banking itself is a direct by-product of the gold standard.  The first instances of fractional reserve banking came into existence when banks began issuing more receipts for bullion than they actually had in reserve.  Nothing physically prevented them from doing this.  They might have to face market consequences for this fraud, but obviously it would be better if the monetary system simply prevented them from committing this fraud in the first place!

Really think about this for a minute.  If the government made a law today that eliminated fractional reserve banking and froze the number of dollars in circulation at a fixed level, how would that be functionally any different than a gold standard?    Would it even matter if those dollars were backed by gold or not if the money supply could not legally be inflated?

The arguments in favor of a gold standard all revolve around the idea that physical gold can not be “printed up”, which limits the ability of governments to inflate the money supply.  But since all gold must ultimately be represented by paper in order to be useful as a money, obviously this undermines the check against inflation that gold brings to the table.

Another problem with paper representing gold is that paper is easily destroyed while gold is not.  This represents an accounting problem for banks issuing the paper.  If paper is destroyed, the gold that is represented by that paper still exists, but now that gold is in a state of limbo.  There is simply no way for the bank to know with any certainty that the paper was really destroyed.  Every bill that is lost puts the gold behind that bill permanently out of circulation (assuming the bank abides by standard accounting rules).  In a large banking system, this dilemma represents a real problem.

I argue that what “backs money” is unimportant. What matters is that the units of account that people use can not be inflated.  What matters is that I can not simply alter an account balance by plugging some numbers into a computer.

Fortunately for us today, such a currency exists.  It is called Bitcoin.  It is a decentralized peer-to-peer encrypted currency system that totally prevents arbitrary inflation of the units of account.  With bitcoins, one can not simply increase an account balance of Bitcoins by arbitrarily entering some numbers into a computer.   The actual currency itself is unreproducible.

In order to increase a Bitcoin account balance, the transaction must be validated against the entire peer-to-peer network.  The entire network knows the account balance of every wallet in existence and it will refuse any changes that attempt to alter number of Bitcoins in existence.  Bitcoin account balances simply can not be inflated.

This cryptographic method of approving transactions prevents arbitrary inflation of the money supply in a way a gold standard never could.  It stops fractional reserve banking before it ever gets started.  People don’t have to worry about banks defrauding them through fractional reserve banking under a Bitcoin standard because it literally can’t happen.  The FDIC would be completely out of a job.

Further, the destruction of Bitcoins is of no consequence other than to the person whose coins were lost.  This is because Bitcoins are basically infinitely divisible.  So as coins are lost for various reasons, it will simply drive up the price of the remaining coins.  No accounting issues are created by the destruction of the coins.

So to my libertarian brothers who think a gold standard will solve all our problems, I say you are leaving out the biggest problem of all!  The fact that gold must be represented by paper for it to function as a currency in our modern economy!  Do not forget about this issue or brush it aside. And do not dismiss crypto-currencies simply because they lack a gold backing.

Remember, the market should tell us what money is and what it is not.  And the market has spoken.  Bitcoins have value because the market says they have value.  They are not imposed by government decree.  They are not mandated by law.  They have value purely because people can see the inherent value in a token exchange system that is decentralized and impossible to inflate.

Bitcoins are real market money for the digital age.  They are the solution to the inflation of gold receipts by banks and governments.  They solve the fraud problems that pervade all commodity representation systems.


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  • Anonymous

    Bitcoins represented on paper?

    • The great question is why would anyone do that?  Since they are already digital, there is no need for them to be represented by anything.  It is like sending gold across a wire.

      I suppose you could have a bitcoin backed cash paper, but there would be no “representative” account balances at banking institutions.

      • I completly agree with this article. Thanks very much for putting the issue so clearly. Bitcon simply has the ‘features’ required. I think its more a matter of when society is ready for something like it, this bicoin crypto tech offers a true opportunity away from centralization. I made a more humorous post around similar thoughts.  http://servanlog.blogspot.com/2011/08/bitcoin-fear-and-goldsilver-basic-logic.html Also the loss issue you point out with a paper equivalent is still present with bitcoin. If people loose a wallet or  their key in some way , those bitcoins and gone forever. But thats ok as they are not sitting anywhere in the physical world to be seen and claimed, i dont think anyone would ever know there is no owner to those lost coins, but there will forever be a growing proportion of the final 21million coins issued that is ‘lost’.

        • Philosopher Rex

          Because bitcoins are digital, you can back up your wallet! You can’t do that with paper money. Hence if you lose your wallet, you go to the cloud and download your backed up encrypted wallet and off you go again. Advantage bitcoin.

      • Jaisgossman

        think smaller.

  • Anonymous

    Bitcoin is not money, it is a currency. Gold is Money.

    • Your logic is flawless.  You should teach economics at a liberal college.  They would hire you immediately.

    • Anon

      What the fuck. What does this guy think the difference between “currency” and “money” is exactly?

      • I’ve heard some claim that currency is a unit of account / something widely-recognized and used in trade while money is a store of wealth. Not saying those definitions make sense, just what I’ve heard.

    • WB93

      Clever, but flawed. A classical ‘distinction without a difference’. Reminds me of what some German philosopher said about Shakespeare… the plays and sonnets weren’t written by Shakespeare, but by a man named Shakespeare. ‘Money’ and/or ‘Currency’ – It’s all about the ‘medium of exchange’. Historically, many different items have been used as a medium of exchange (shells, tobacco, chickens, etc). Gold has many uses, including as a reliable and lasting form of currency. But gold is also used for filling teeth, fashioning jewelry, and making electronics.

  • Dylan

    I’ve had the same opinion ever since I became a free-market guy/libertarian. A gold backed currency would be easily bastardized, and like you said, it would be a pain in the butt with all these websites like amazon.com. BitCoin is perfect for this day and age of online shopping and banking.

  • Christian

    Bill Still – The Secret of Oz
    A smart guy that has a good solution to the economic problem.

    • Bill Still wants to print money if I’m not mistaken.  I don’t think Bill’s solution is viable. Further, Bill’s solution would require the use of fiat currency laws imposed at gun point.

      • Bartersilver

        Yes, Bill Still correctly understands that it is the quantity that matters, not what “backs” it.  Unfortunately, he believes the government should be in charge of printing the money and spending it on “infrastructure”.  As long as gold and silver satisfy the requirements of money they will forever serve as money.  If the internet goes down, what happens to bitcoins?  I suggest a verifiable vault protected by the county sheriff with a transparent record of balances drawn upon by debit cards.

        • “If the internet goes down, what happens to bitcoins?”, thats like asking, what if the air we breathe disappears? lol Internet is growing bigger and bigger, second by second (since many years ago)…. i think it’s more viable to think the sea will be out of water then internet will ever end…….

        • da ThRONe

          Less than 5% of money are physical dollars today. Even if we switch to a gold standard paper money is at far greater risk than bitcoins.
          If the internet has some type of mass failure money would be only one of the major issues people would have to deal with.

  • Peter Surda

    Hello Michael,

    about 3 weeks ago I started a debate about Bitcoin and FRB that got pretty heated. You can read about it here:
    and here:

    It resulted in a new wiki page: https://en.bitcoin.it/wiki/Fractional_Reserve_Banking_and_Bitcoin . I’m responsible for the Austrian section of it. I go into more depth than you, but in general, I agree with you that Bitcoin protects against the inflation of the money supply than gold.

    One project that stands a chance to inflate the supply of money is Ripple, but it is unclear how competition to Ripple develops that might mitigate against this. There is new entrant called OpenTransactions, for example, but I still don’t understand how it actually works (even though I was at the Bitcoin conference in Prague and the founder presented it there), so I don’t know if it counteracts the inflationary basis of Ripple at all.

    • Yeah that guy you are arguing with is an idiot.  

    • Ripple is, to me, an even more pure form of currency than Bitcoin. The salient difference is that it requires trust and isn’t anonymous (or as anonymous). Those points could be a gain or loss over Bitcoin depending on how you look at it.

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  • Skyler Collins

    I think the proper libertarian position is against any government-based “standard”. It’s against any government-based anything.

  • Christian

    I have a general distrust of anything electronic. I don’t see anyway around that. I looked into bitcoin and while it sounds like a good idea it won’t work at all if the power grid went down for example.

    • Nothing works when the power grid goes down.

      Brick and mortar stores aren’t going to be selling anything with the lights off either.   But besides that, the network can be accessed on cell phones and through credit networks.  So as long as your smart phone has a signal, you can send coins.

      • Serge

        Just to be real, If I do not have power or internet I can still buy from the store, or make some kind of exchange.
        We are NOT dependant on the internet, NOT EVERYONE pays everything using internet, there is a LOT of people that doesn’t even have access to it. I can change a chicken for some milk, that is REAL value.

    • GregDoomie

      Exactly. People are forgetting that the STATE owns the internet. Fatal flaw. We need to get serious and develop a true peer-to-peer “alternet” (computers DIRECTLY connected to each other, with security features, of course), all sharing a common _opensource_ application with which they connect. Opensource progs ensure transparency and verifiability and a _peer-to-peer_ system ensures that it’s impossible to take down any significant part of the system (think Borg). A _multimetrics_ economy of democratically traded values ensures a strengthened balanced currency that isn’t prone to the 80:20 rule of haves and have nots and which collectively ascertains the value of things in more than just demand (as with capitalism) or social need (as with socialism).

      Does Bitcoin have any of these qualities? Not even close. It’s just on the right track but we need to think waaaaaay past all this if we want to be _serious_. When the stock market crashes though, I believe necessity will be the mother of massive innovation.

      • I find some humor in the fact you have enough brain cells to be able to write a post on the internet, yet your posts are so damn dumb its a miracle your brain remembers to tell your body to breathe regularly.

        • Serge

          I would take this more serious if you weren’t so unpolite and calling everyone that disagrees you dumb and/or idiot.

    • Adam

      I hate to break it to you, but everything (gold and fiat money included) is just numbers in a computer, bitcoin just makes sure no one can change the numbers for any reason.

      FYI, i am holding 3 btc brass coins, worth about 5.50$ each 🙂

  • Mrmagick93

    The problem of a gold standard is only a problem when it is suggested as a Government standard.  As a government standard then all of those problems become everyone’s problems because you are forced to use gold and silver or the paper recipes that you mentioned.  However in a truly free market, gold would have to compete as a currency with other such currencies, including bitcoin.  I was a big fan and early adopter of e-currencies.  I got in early with e-gold, but then saw the handwriting on the wall and cashed out before my gold got seized.  Bitcoin is one possible solution to the problems you mention, it may not be the best.  Time will tell if Bitcoin has the stability and robustness necessary to be a global currency.  The beauty of the Bitcoin phenomenon is that if Bitcoin fails or fails to catch on, there will new p2p currencies that will be better, stronger and safer and more private than Bitcoin.  The cat is out of the bag and the source code for Bitcoin is public so even if it fails, it is just the beginning for p2p money.  Great article by the way.

  • “It is curious to me that so many libertarians are dead set against any form of currency other than gold when history has made it abundantly clear that a gold standard can not be maintained.”

    Has history show us there is something wrong with gold or something wrong with government managed gold standard ?

    “Consider that as soon as gold is represented by paper (or digital account balances), all the checks against inflation of the money supply that gold provides are lost.  In order to argue that gold can not be inflated, one must also argue that all transactions in the economy must take place using physical specie.”

    Not really. As long as I sign a contract with the bank in question, they would have to specify how they would keep it. In fact in todays digital world, ANY notion that the bank is swindling would be nipped in the bud.

    Have you not read Money, Bank Credit and Economic cycles ?

    “Which means it is ultimately of no more use in preventing inflation than if the government simply created rules today outlawing the inflation of dollars.”

    Yes, the Friedmanite solution. The government sets a rule on itself and promises were dearily to keep to it.

    The point is that as long as gold is able to be requested, there is a rather serious limitation on inflation. If bankers cannot swindle, ie break their contracts. That is a requirement that keeps it at 100 % reserves.

    Furthermore yes, if the government maintained a 0 % money supply growth rule, they would stop inflation and in fact have less inflation than under gold. So what ?

    “Would it even matter if those dollars were backed by gold or not if the money supply could not legally be inflated?”

    It matter because the “legal rule”, could be circumvented. The physical gold could not. Furthermore its not about backing the dollar with gold, it is about making a dollar gold.

    “Another problem with paper representing gold is that paper is easily destroyed while gold is not.”

    Come on, man what the hell are you talking about ?

    Only if you deliver in your notes are they destroyed and new ones issued upon depositing gold/silver.

    “Every bill that is lost puts the gold behind that bill permanently out of circulation (assuming the bank abides by standard accounting rules).”

    That is why checks and debit cards would be most common.
    Especially in our society, but the same can be said if you burn fiat currency today.
    The reason this is not a problem is that very few people want to or can afford destroy MONEY, because MONEY is worth something.

    “Remember, the market should tell us what money is and what it is not.  And the market has spoken.  Bitcoins have value because the market says they have value.”

    I agree. I do not hate Bitcoin, but I do not think they would survive without legal tender fiat currencies, and a large black market(created by governmental laws and taxes). With out these interventions, Bitcoin would lose all its appeal and gold/silver/commodity money would win.

    The point is also that, whenever a society has been free in monetary matters they chose gold/silver/copper.

    • “The point is also that, whenever a society has been free in monetary matters they chose gold/silver/copper.”

      Clearly not.

      Bitcoins are not imposed by fiat and people are choosing to use them in ever greater numbers. Further, you neglected to mention a method of PREVENTING the issue of unbacked notes by banks.

      Catching a fraud after the fact means the fraud was still committed in the first place. Bitcoins prevent bank fraud.

      • You are missing the meaning of my argument.

        I was claiming that, when a society has been totally free to choose they chose gold/silver/copper/commodity money. 

        When you say “clearly not”, do you mean that people are free in monetary matters ?
        Do you think people have chosen voluntarily to use FED notes ?

        I am not saying or ever said that BitCoin is fiat, but that its advantages or its use comes from the fact that the alternative is imposed fiat currencies.

        Lets say there are other advantages to BitCoin, as you mention above and that it is better. Let there be a free market and let BitCoin compete against gold and etc. we will se which is best. 

        I am pretty sure people absent govenrment mandates and a huge black market(for example drug market), would not want BitCoin and would opt for gold & silver.

        Furthermore, you critized libertarians for defending gold and its wrong. You did not address the arguments for gold/commodity money.

        On the fraud issue, that concerns also BitCoins. Furthermore when fraud/cirme is caught, the offender has to rectify it, its not like it ends there.

        • Peter Surda

          “Fraudulent” Bitcoins are detected automatically: they are incompatible. Trying to pay with a “fraudulent” Bitcoin is the equivalent of attempting to put a square peg into a round hole. 

          Futhermore, the creations of various forms of money (based on gold) requires the inception of debt instruments, which may become money-substitutes and increase the money supply. All debt instruments carry maintenance costs and these need to be covered somehow. In general, you have a choice between demurrage and overissue (FRB). Based on historical data, on a free market, overissue wins over demurrage. Making it illegal does not fix the underlying economic principles. Attempting to ban FRB would be about as effective as attempting to ban drugs, because there continues to be a demand for debt instruments with externalised costs as method of payment.

          Bitcoin can exist in practically any form without needing debt instruments. You can have it at a service provider, on your computer, on your mobile phone, in Casascius coins, Bitbills or any other numerous existing and not-yet-developed forms. No demand for debt instruments as media of exchange -> debt instruments do not become money substitutes -> FRB does not cause an increase in money supply. Bitcoin wins. Gold loses.

        • Peter Surda

          Oh and in the 1930s when the FED confiscated gold, it was possible to do this because people in general still believed that depositing the gold in the FED and receiving paper money / demand deposits instead is necessary to fix the economy, and the FED had their trust. Public opposition was almost nonexistent. Nowadays it’s obvious to more people that it’s a scam, and the media is much more diverse.

        • I have no problems with bitcoin being in competition with gold/silver in a real free market.

          I don’t think gold or silver stand a chance against it in the long run.

          With no FDIC, people will want the assurances of a crypto-currency to protect against the fraud of fractional reserve lending.

          With gold and silver, one must watch the banks like a hawk to make sure their paper issue matches their reserve holdings. With Bitcoin, one does not need to worry about this at all.

          • Well, anyway you claimed that “clearly not” would gold win over Bitcoin in a free market, because gold is not used as money and BitCoin in some form are used as money. Actually gold is used as money today, in some places and some markets like BitCoins are.

            I questioned this, by saying that the current legal system is not a free market and if you thought so. No answer was given.

            So I think of your idea of why BitCoin is popular now, is wrong. I think BC(again as I have said) is popular now, because of the large underground market and the increasing need for privacy from govenrments.

            Without governments these things would be totally meaningless, and bitcoin would not stand a chance against commodity money.

            Without FDIC and the FED these banks would not survive, and especially today when information can spread so quickly.

            One must not watch banks like hawks, because there will be a profit motive to catching and bankrupting them. They will therefore not able to do this, and people would make money if they did and they would immediately be bankrupt.

            Furthermore, in an ancap society every contract must be upheld and in the case of deposit contracts they would require 100 % reserves and bankers would go to jail if they cheated.

          • You can believe what you like about why bitcoin is popular.  It may very well be that it is doing so well because it has a large black market following.  That doesn’t change anything about its benefits.

            I’d like to point out that the black market will drive Bitcoin into the mainstream, so we can thank the State for making it illegal to purchase everything. We are bearing witness to the birth of an entirely new currency system. The world will take a while to adapt.

  • Christian

    Certainly gold and silver are power grid proof in their physical form. I distrust anything that is electronic because of our power grid. The weakness of computers is the fact they are insecure in many ways. I tend to think big box stores are on the way out. They have way to much overhead to weather the coming economic storm of derivatives.

  • A Country Farmer

    Ron Paul, the leader of the movement you criticize, is very, very clear that he is not for the gold standard, but for removing the government monopoly and legalizing competition and letting the market decide on the standard(s), one of which will probably be gold.

    You are very good at setting up strawmans.

  • Anonymous

    I think the idea is that with a gold standard, every person holding a
    dollar bill knows that the bill is only “real” inasmuch as he can demand
    the relevant amount of physical gold at any time. It’s like an
    enforcement mechanism; government can get up to whatever other mischief,
    as long as the gold is produced on demand. If you simply have laws requiring that the money supply not be inflated, ordinary people can’t verify that easily,
    nor is there a personal, specific incentive to worry about it the same
    way I will worry about whether the bills in my hand are valid. If you trust government enough to believe they will abide by their own laws, then you don’t need the gold. (But…you need the gold! Believe me, you need it!)

    • Philosopher Rex

      Historically, it was the case that people left gold in the hands of goldsmiths in return for IOU’s. The problem was that after a time, people forgot about the gold and relied on the IOU; at which point the goldsmiths started making more IOU’s knowing that few would come to check on the existence of the Gold, and those who did, would find the gold. . .yet they inflated the money supply in any case. Such a fraud cannot be committed with bitcoin.

  • Carl Jakobsson

     “The arguments in favor of a gold standard all revolve around the idea
    that physical gold can not be “printed up”, which limits the ability of
    governments to inflate the money supply.  But since all gold must
    ultimately be represented by paper in order to be useful as a money,
    obviously this undermines the check against inflation that gold brings
    to the table.”

    It is only correct to say that it undermines the state’s ability to print money, relatively a world where there is no frb. Under a gold standard, the state can only print more money like a bank, since all their paper notes must be redeemable in gold. So the government would be as limited to print money as banks today – or not really since Basel puts a limit on how much reserves a bank must have, but a few years ago there were no such restraints on bank here i Sweden, and I believe they held about 10% in reserves – are. That is, they would be more limited than under the current regime; it would be harder.

    The state is not in the exact situation as a bank is, since they can extract wealth by force, but otherwise the mechanism is the same.

    A part of this check by the gold standard is that the central bank is not the only bank that gives out paper money or bank deposits, which increase the money supply. The banks are, kinda, all competing to be the ones that increase the money supply the most. Or, they are all competing for you to trust their notes, their deposits; the larger banks can produce more paper money under frb. Thus, as the state is just like all the other banks, it can only produce more “tokens” as the consumers would allow them to.

    Under a gold standard, the state’s ability to print money would be severely limited by today’s standard.

  • Adhavoc

    It’s important to realize that bitcoins are not a form of money, they are merely a media of transaction.  See Carl Menger “On the Origins of Money” http://www.cooperativeindividualism.org/menger_money.html

    • Philosopher Rex

      Bitcoins do have intrinsic value – they are a secure, encrypted, non-counterfeitable unit of exchange. They are not backed by anything except their own value as a unit of exchange.

  • GregDoomie

    Bitcoin is bullshit. Don’t market that!!! But at the same time… it’s on the right track. It’s missing something though. One, it needs to stop evaluating things in terms of capitalist demand _only_

    • GregDoomie

      Sorry, I didn’t realize how retarded this commentbox system is and it immediately sent a comment I wasn’t finished typing yet. F*ck. Anyways, as I was saying, Bitcoin is just more bullshit because in order to repair the mess of inflation, we need to scrap the cult of capitalism and replace it with a multimetrics economy that includes capitalism along with all other possible economies and values. These values (ie. “metrics”) must be maintained and shared and traded by the people without state. Yes, decentralization and peer-to-peer is the right direction. But we need to have a true peer-to-peer INTERNET too otherwise it’s still under control of the state and it needs to scrap the demand-only currency and replace it with a MULTI-VALUE currency (demand metric plus any metric considered valuable to the collective). In this way, all metrics balance each other out, avoiding the Pareto Principle apocalypse that unimetric economies like socialism and capitalism regularly (and purposely, through manipulation by the ultra-rich) face.

      • Philosopher Rex

        bitcoin is a protocol. It can be used on any type of underlying network. Also, you might want to look up the definition of capitalism, I don’t think it means what you think it means – try a dictionary.

  • Look up printcoins.com for bitcoins as paper money.

  • Jethro654
  • matt k

    the best thing to do is to put a gold standard on, and use competing currencies.  We want competition in everything but money, the most important thing because money is one half of all transactions in the world.  The point is, if the FED starts to inflate they will have much more incentive to keep the value of their money up.  Or ppl will dump the dollars for another currency that is safer and more valuable.  So basically it eliminates the FEDS monetary monopoly over the whole world.  Which they back with toxic assets and IOU’s.    Currencies are only valued otherwise on the government use of force.  It makes money independent of government meddling and manipulation.  History also shows the damage of inflation and how governments manipulate the money till it destroys their own countries.  I do not trust the elites of the world with all the money…. do you?

    • GregDoomie

      “We want competition in everything but money”

      Prove that statement.

    • GregDoomie

      “I do not trust the elites of the world with all the money…. do you?”

      Then why do you still talk in terms of States making and controlling the money? You sound conflicted and muddled.

  • James Stallings

    The problem with the Gold Standard, is that it does not allow for economic expansion.  The universe of money is fixed to the available supply of the rare metal.  Most whio advocate for the gold standard also advocate for criminalization of fractional reserve banking.

    Fractional reserve banking, and the creation of wealth “out of thin air” are ESSENTIAL to the function of any modern economy.

    Last year I took a business loan, bought new equipment, increased production (and revenues by 100%), and hired two people.  Without the loan, the new production, the two new employees, and the jobs created by purchasing equipment that had to be manufactured FIRST, would not have been possible.

    Although the money was created “out of thin air” through fractional reserve banking, it is now represented by an asset (just as good as gold in my opinion), and produces enough revenues to repay the banker at an accelerated rate.

    I believe the economy of this country would come to a screeching halt if we went back onto the gold standard, or if we outlawed or even restricted fractional reserve banking.

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  • runeks

    Michael Suede, I believe your understanding of fractional reserve banking is incorrect. Fractional reserve banking does not constitute issuing more bank notes than you have money proper to back it up, it is simply not having a depositor’s full deposit available for immediate withdrawal.

    This is not a problem as long as the durations of the bank’s assets and liabilities are matched. If I deposit 100 bitcoins into a bitcoin bank account that is locked for one year, and the bank takes 80 of those bitcoins and buys a 1-year bitcoin bond that yields 5% p.a., no money has been created out of thin air. My money (100 BTC) has simply been lent to the bank, as a 1-year loan, and the bank has lent out 80% of my deposit to the issuer of said bond as a 1-year loan. 80 bitcoins have been transferred from me to the bond issuer. No additional money has been created.

    In a fractional reserve banking system, money only starts being created out of thin air when you have duration mismatch – when asset and liability durations are *not* matched. Ie. when I, for example, deposit 100 bitcoins in a demand deposit account, and the bank uses 80% of it to buy a 1-year bond. This would mean the bond issuer would now have 80 bitcoins available to spend immediately, and *I* would have 100 bitcoins bitcoins available to spend immediately. Tadaa! 80 “unbacked” bitcoins created out of thin air.

    • I understand that completely, and I never suggested otherwise.

      I said, and I quote, “fractional reserve banking itself is a direct by-product of the gold standard. The first instances of fractional reserve banking came into existence when banks began issuing more receipts for bullion than they actually had in reserve. ”

      That statement doesn’t contradict what you just stated.

      • runeks

        Great! I can see I have misunderstood your comment.

        The points you raise seem like an argument for an increased block size limit. Some promote that we keep the 1 MB limit of today, so that the block chain will continue to fit on consumer PCs in the future, but that means we run the risk of transactions becoming so expensive that off-chain transactions dominate transaction volume.

        So in the end, the choice is really between favoring decentralization of Bitcoin nodes/miners (via limiting block size limit) and favoring on-chain transactions (by removing the block size limit).

        As far as I can see, if people ever start accepting fiduciary media of exchange derived from bitcoins as money, the tendency will be towards centralization. When an entity gets its own fiduciary medium of exchange accepted as money, it cannot default. At least not on obligations denominated in that medium of exchange. The tendency will be for more banks to join this currency system, as they will also gain the advantage of not risking default.

        On the one hand I think an arbitrary constraint on block size might do more harm than good, as it encourages transactions being performed via fiduciary media of exchange, instead of settling transactions via money proper in the block chain.

        On the other hand, some good points are made in this post (and thread): https://bitcointalk.org/index.php?topic=109467.msg2272759#msg2272759
        Mainly that block size limits are not a problem now – fees are not too high. But the decentralization of Bitcoin nodes and miners are starting to become a problem with a 8 GB block chain.

        • I have faith that the market will workout the technical aspects and arrive at the best possible outcome given the present technology. It may be that Bitcoin is not the best in its present form.

          I’m less interested in the technical aspects, because a better currency can always be created. I’m more interested in the economic principles the Bitcoin monetary system encompasses. From a strictly economic standpoint, I think Bitcoin is as good as it gets.

  • Kapt Blasto

    What Bitcoin does NOT take into account though, is the fact that there _IS_ a sort of DIVIDING LINE, a BOUNDARY, if you will, between, the Federal Reserve’s monetary creation, and the larger economy, where the Money supply circulates, and where it IS accounted for, BY the FEDRSV.

    No new money can come into circulation, UNLESS it passes the BOUNDARY LINE, and it passes the boundary by the FED LENDING that new money in, and expecting it returned, with INTEREST.

    Now, the hard part is, MEMBER BANKS…tempted to INFLATE money, on their own, in ways they know, so that they have money to pay back the FED, when the idea is, to DRAW the other currencies in and have them exchanged for Dollars to circulate here, so that the inflation would be unnecessary.

    And that’s on top of, paying back the other depositors at the Member banks, who are promised an interest rate for SAVINGS, which come by Lending their money to borrowers who are supposed to pay it back with interest, as well….


  • Bongstar420

    Funny, bitcoin is just as volatile as anything. Did anyone ever consider that things like inflation were really expressions of market dynamics and economic hierarchical repositioning rather than blind currency dynamics? The bitcoin price was a speculative bubble. There will be more. You wont have flat exchange rates ever.




    You surely don’t understand money. Today money is backed by the full faith and credit of the United States government. Let me put that another way….Money is backed by the ability of the IRS and ATF agents to break down your door, smack you in the teeth, frighten your family to death, handcuff you and your wife or husband, seize all your assets, make your family homeless and put you in prison in a matter of days. This is full faith and credit! The author also makes the mistake that if we have a system whereby paper money is “backed” by gold, it could never work. That being said, wouldn’t it work if honesty prevailed and the law maintained that the rules of the game be followed? Then every dollar would successfully be backed by gold. The United States government did this for years before the communists took control. I hate deceivers.

    • “That being said, wouldn’t it work if honesty prevailed and the law maintained that the rules of the game be followed?”

      I believe the technical term for that is called a “pipe dream.” It may also be referred to as “Fantasy Island” run by a midget named Tattoo.

  • WB93

    It’s amusing, in a way, to see the extent to which post-modern-feminist ideas have penetrated the minds of otherwise rational people who tend to have a healthy skepticism about most things. Specifically, I disagree with the notion that there’s no need to bother with things that have physical existence and can be measured. According to this way of thinking, Bitcoin is just as good as gold (some say even better). It’s all supposed to just be a matter of what illusion we can project and then get others to agree with. Isn’t Bitcoin following the same distorted logic as Federal Reserve currency? I don’t see Bitcoin as the fulfillment of Libertarian ideals any more than the Federal Reserve or Progressive economics fulfills those ideals. Bitcoin has all the elements of a fraud scheme (again, exactly like the Federal Reserve). The further we move away from measurable objective reality, the deeper we go into a delusional state of mind that can only breed the most hideous monsters. Science has followed a similar path… embracing abstract mathematics that few can understand and ignoring simple experimentation that most of us can grasp. Gold is a good, practical, enduring standard for currency. So is silver. And it’s interesting that, ultimately, the price of gold still figures prominently in economic analysis. Gold will exist so long as the universe as we know it exists. Bitcoin (or other crypto-currencies) will exist only so long as there are people with electronic gadgets.

  • Dave Snodgrass

    The only reason bitcoin came into existence is because people found out it can be used in the dark spaces of the web with out being tracked. Were these dark spaces of the internet to be cracked down on as they are attempting to do with NASA’s help we could see a significant drop in the value of bitcoin. In an alternative scenario if they legalized drugs there would be no need to use bitcoin to purchase them on these black markets. We can logically assume since bitcoin was created for use in the dark spaces of the web were they to crack down on or negate the need for these dark spaces bitcoin would hit the floor pretty hard. However I think we should be free to use bitcoin for online purchases and gold and silver for physical purchases if we so choose. I am not completely against having a currency online that isn’t connected to any physical currency. Let people use bitcoin for online purchases and gold and silver for physical ones, problem solved.